Economic activity in the Seventh District continued to expand at a modest pace in June and early July. Consumer spending and business outlays rose at rates similar to those reported earlier in the year. Labor market conditions were mixed by industry and location. Residential construction declined further in most areas, while the pace of nonresidential development was generally steady. Conditions in manufacturing were little changed from the past reporting period. Household lending declined, while business lending edged up. Energy costs rose, and on balance, other prices increased at a steady rate. Wage gains were similar to those in the previous reporting period. Growing conditions for corn and soybeans deteriorated in most of the District due to hot and dry weather.

Consumer Spending
Consumer spending continued to increase at a gradual rate. Retailers said that sales gains in June and early July were moderate, though a few national chains reported that sales in the Midwest were stronger than other regions. One industry analyst said that consumers were being more cautious due to persistently high gas prices and rising food prices. Inventories were generally in line with desired levels, though some retailers said they were being more conservative than usual to avoid end-of-season discounts. Vehicle sales in the District during early July were running a little better than the June pace according to one auto dealer. Vehicle inventories were a bit below seasonal norms. A restaurant chain reported strong sales and that results for the quick-casual segment continued to be better than for sit-down restaurants. Tourism activity varied throughout Michigan. One contact said that activity was "down significantly from last year," while a hotel in another location reported a 15 percent increase in occupancy; most contacts, though, projected that tourism in their areas would stay in line with recent experience.

Business Spending
Business spending rose again in the District. Capital expenditures continued to increase in line with previous plans for modest gains. Truck freight loadings declined modestly on balance, though shipments of bulk commodities were strong. A regional airline reported an increase in bookings and load factors during June. Changes in labor market conditions were mixed by industry and location. Several toolmakers reported expanding payrolls; a pharmaceutical company said the number of new hires and job openings were both strong; and a distribution center reported an increase in its head count. In contrast, a nationwide homebuilder announced it was exiting the Indianapolis market; a construction materials firm cut jobs after deciding not to rebuild a plant destroyed by a fire; and a bank said it laid off more workers than it initially planned. Billable hours for temporary placements were declining at a steady rate, but one staffing agency expected some firming in the second half of the year.

Construction/real estate
Residential construction and home sales fell again in most areas. Home builders reported steeper declines in construction in Des Moines and central Indiana, and a contact in Milwaukee said many area builders had trimmed their holdings down to only model homes. A builder in southeast Michigan projected further declines in the coming months. Realtors in most markets noted that homes were taking longer to sell, though a contact in the Detroit area said selling times edged down from high levels, and a banker in Iowa reported that rural residences were still selling quickly. Home prices were increasing at slower rates, and one contact said some sellers were even offering cars and plane tickets as added incentives. Contacts in Indiana and Wisconsin said an unusual number of sales were distressed properties (fixer-uppers or foreclosed homes). Still, analysts in Indianapolis and Des Moines characterized sales conditions as returning to "normal" or "traditional." The pace of nonresidential development was generally steady. A developer from Indiana said that industrial construction increased slightly. Nonresidential vacancies were steady or improving in most areas.

Manufacturing
Conditions in manufacturing were little changed compared with the previous reporting period. Manufacturers of machine tools and equipment parts continue to report the best results; contacts in these industries said sales to defense, electronics, and medical customers were strongest. Demand for some agriculture machinery was higher than expected and forecast to strengthen further in the second half of the year due to high commodity prices. In contrast, sales to domestic customers of other heavy equipment, particularly construction machinery, were flat between May and June and below expectations. However, manufacturers in a number of industries, including machinery and heavy trucks, reported strong demand from abroad. New heavy truck orders in the US remained weak, and although contacts believed sales would bottom out the second quarter, they were not expecting much of a recovery until 2008 or 2009. An automaker said that nationwide sales in early July seemed "a little soft." Vehicle inventories were "coming into normal levels," though stocks of fuel-efficient models were low. A steelmaker said the market was flat at "not bad, but not robust" levels. Steel inventories continued to move lower, and one contact thought that an inventory build would be needed by the end of the summer. Contacts said that shipments of cement continued to fall due to the weakness in housing.

Banking/finance
Household lending declined modestly. Consumer credit quality deteriorated slightly; delinquency rates for home equity loans and lines of credit edged higher, though delinquencies for first mortgages were little changed. Foreclosures increased in Michigan and Wisconsin. Lenders were tightening mortgage borrowing requirements, but one banker noted that underwriting capacity remained greater than loan demand and mortgage spreads were "as thin as I can remember." Business lending was flat in Michigan and growing weakly in other areas. Business credit quality remained favorable, though one banker in the Detroit area described it as "slightly less pristine." A bank in West Michigan reported that a significant portion of its nonperforming loans were to a single homebuilder. Standards and terms of commercial loans were competitive though tightening modestly, according to one contact.

Prices/costs
Outside of energy, nonwage price pressures and overall wage increases were similar to those in the previous reporting period. Almost every contact noted higher gasoline prices, which were attributed in part to a soon-to-be-resolved disruption at an Indiana refinery. A trucking firm said it had been able to recover much of the fuel cost increase through surcharges. Several other commodity prices, such as scrap steel, coke, and copper, remained at high levels. A contact in the cement industry reported some potential for price increases with fewer imports coming into the U.S. Vehicle incentives were generally steady, well below year-earlier levels, and one automaker said it had no plans for any new discounts. Average airfares declined at one carrier, and hotel rates in Michigan were generally steady. A staffing firm reported that its pay rates rose at a steady pace.

Agriculture
The condition of the corn and soybean crops deteriorated in much of the District during the reporting period. Crop conditions were worse than the previous year in Indiana and Michigan, reflecting hot and dry weather. Recent data indicate that more corn was planted than reported earlier, and corn prices moved sideways from early June to mid-July. Soybean prices moved higher. Forage and pastures were hurt by the lack of precipitation, leading to higher prices for hay. Higher feed costs squeezed livestock and dairy producers. Even so, increased dairy prices allowed dairy operations to make a profit, and while hog prices were down by the end of the reporting period, they remained high enough for producers to earn profits. Cattle prices also fell, and cattle operations struggled to avoid losses.